The Elasticities of Complementarity and Substitution

Peter Broer

No 04-101/1, Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: This paper argues that the conventional definition of the elasticity of complementarity is not well suited to deal with the case of increasing returns. It proposes a slightly different formula, that uses a distance function formulation instead of a production function. The proposed definition coincides with the Hicksian measure in case the production function displays constant returns. It is more informative in case returns to scale are not constant, as it disentangles entry effects and substitution effects of factor supplies. The new definition is also preferable in that it is fully symmetric with the definition of the elasticity of substitution.

Keywords: distance function; elasticity of complementarity; returns to scale; tangency condition (search for similar items in EconPapers)
JEL-codes: D21 D43 L16 (search for similar items in EconPapers)
Date: 2004-09-14
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:tin:wpaper:20040101

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